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Brazil Superstar?

World Security Network President Dr. Hubertus Hoffmann traveled for three weeks through Brazil, here below the Sugarloaf in Rio de Janeiro: "Brazil contains several risk factors and roadblocks to growth which I believe are very serious, making me more skeptical than the BRIC enthusiasts on Wall Street."

Discovering the unknown is easiest when viewing from a great height: you see the bigger picture and don’t get lost in details. There is no better place for a tour d'horizont of Brazil, with its 8.5 million square kilometers and 200 million people, than the top of the Sugarloaf in Rio de Janeiro. The breathtaking view contains the Jesus statue in front, the marvelous long beaches of Copacabana and Ipanema, and the favelas climbing up the mountains.

With a world-beating Caipirinha in hand and the sunset to my front, I smile at the Goldman Sachs super-analysts and other Wall Street gurus who have carved out Brazil, Russia, India and China into the ‘BRIC states’, so combining dynamic growth and investment opportunities into one basket. They are as wrong as they were by failing to predict the subprime crisis in 2008: each BRIC country is very different in history, mentality, opportunities, risks and opportunities.

Is Brazil really the superstar of the 21st century along with China?

What would a stress test reveal of this South American country?

Brazil has good chances of prosperity: a large population with dynamic growth, ranking now No. 8 in GNP worldwide. The climate is moderate, almost any kind of crop grows in large quantities, and there are newly discovered oil reserves in the Atlantic.

However, Brazil contains several risk factors and roadblocks to growth which I believe are very serious, making me more skeptical than the BRIC enthusiasts on Wall Street.

First, the education level in Brazil is breathtaking poor above the early grades of school. With no focus on teaching English, the language of the internet age, most Brazilians lock themselves out of global knowledge flows – even many Brazilan businessmen, politicians and intellectuals. India, China and even Russia are very different: the language of the elites is English. Everybody is eager to learn English and send their children to the best international schools possible.

Brazil’s universities are underdeveloped, as are the business schools. The largest South American country still suffers with a rotten higher education system that does not promote know-how as the main source of growth. Standards of craftsmen, engineers, and managers are still too low, as are products and services compared with China, India or Russia.

Only the few rich travel abroad, and for most Brazilians there is little outside except perhaps Portugal, its former colonial master. This geographical and social isolation differentiates Brazil from India, China or Russia, all of whom reach out to the U.S. and Europe more.

Even so, Brazil remains overpriced; not only luxury goods but tourism and the costs of daily living too. Combined with low quality standards, this is dangerous for any national economy as it suggests an isolation from other world economies.

The average Brazilian businessman still hesitates to re-invest what is needed to keep factories and facilities modern, and many squeeze investments for short term cash. This leads to under-investment in many sectors, and older factories than those in India and China.

Agriculture makes up less than 6% of GDP, with only 25 percent of people living in rural areas. Of approximately seven million farms, more than five million are very small and only 50,000 agro enterprises and 1.7 million farms are profitable.

One percent of landowners control fifty percent of the land. An elite of ten percent owns 90 percent of Brazil’s wealth. Brazil has grown to become the world’s 8th largest industrial nation, but too little has reached the mass of its population or even its middle class.

Seven out of ten Brazilians, those from the lower ranks of the social pyramid, have almost no chance of upwards mobility. Brazil still has serious social inequalities, ranking among the 10 most unequal countries in the world along with Namibia, Haiti, Bolivia and Honduras.

Indians at the Rio Negro: "Seven out of ten Brazilians, those from the lower ranks of the social pyramid, have almost no chance of upwards mobility. Brazil still has serious social inequalities, ranking among the 10 most unequal countries in the world along with Namibia, Haiti, Bolivia and Honduras."

Brazil ranked only 75th in the latest UN Human Development Report, behind Chile (44th), Argentina (29th) and Venezuela (58th). Within BRIC countries Brazil was beaten by Russia (71), with China ranking 92 and India far below in position 134. This report takes into consideration GDP per capita, illiteracy, schools and life expectancy indicators.

Low income, lack of education, and the barriers to wealth growth experienced by the bottom half of the population are huge burdens for this country. Brazil remains a country of deep social imbalances, with the elite continuing to profit from progress despite an apparently left wing President Lula in power for over seven years.

President Lula wants to push his country forward at all costs, to make it a more respected middle power at the top table of nations and even a permanent member of the UN Security Council. He supports large agro-industry to the cost of small farmers and the environment. The 'latifundistas' landlords enjoy great influence in the capital Brasilia due to their financial support for political parties and their candidates. No law is passed without their approval.

This and the involvement of state-owned oil giant Petrobras were the main reasons behind the legislature’s program 'Proalcool', encouraging bio-fuel from sugar cane and guaranteeing the landlords high incomes. Besides biofuel from sugarcane, other major crops remain traditional products like soya beans, oranges and coffee.

In the crisis of 2009 Brazil’s GDP decreased by 0.19% - a minor loss compared with a 2.4% drop in the US and 4% in the EU). But as a relative drop back it was more significant compared with the two boom years of 2008 (+ 5.1%) and 2007 (+ 6.1%). In June 2010 the growth rate was up to 2.74 % with a jobless rate of only 7 % and inflation of 4.8 %.

Since 2003 Brazil has improved its macroeconomic stability by building foreign reserves, reducing its debt to a level of 60 percent of GDP and with a better mixture of agricultural, mining and manufacturing. In economic power rankings Brazil was No. 8 in 2009, with USD 1,574 billion, followed by Spain and Canada. China was No. 3 and India and Russia were behind Brazil in 11th and 12th places respectively.

According to the World Economic Forum, Brazil was the leader in increasing competiveness in 2009, rising eight positions and moving past Russia. Within decades Brazil’s economy could become larger than Italy (gap now $500 bn) or even the United Kingdom (gap $800bn). Realistically, a ranking of 7th or maybe 6th is possible; not more.

Yet Brazil’s infrastructure is rotten, including the main airports of Sao Paulo and Rio. The bureaucratic process of airport, road- and rail-building is slow and full of special interests, even special favours to involved politicians. But where should the money come from when foreign investors are scared of investing? Financing all the infrastructure projects for the 2014 Football World Cup and 2016 Olympics will be difficult.

Corruption is still too high at all levels, and the shadow economy is flourishing. Politicians and bureaucrats still believe that they can and should milk the cow while in office: in April 2001 Minister Fernando Bezerra revealed that in only five years no less than one billion U.S. Dollars had disappeared from the Amazon development program into private pockets. In 2005, it became public that managers of Lula's workers party, PT, had established black accounts with $40m that they used to smear members of Congress.

In fact many members of Congress enjoy higher salaries than in many parliaments of the world: $200,000 per year. After decades of voting driven by personal favors, there is little motivation to change this system of self-service.

Corruption in Latin America remains endemic throughout society, with few hard feelings involved. It is considered one element of the normal way of business. The cancer of working for your own pocket before the national interest prevails down to the local level, and the ethos of public service amongst politicians, bureaucrats and often police is weak. It is the main obstacle to progress in Brazil, as with many other countries like Russia, China and India too

Brazil’s bureaucracy is overgrown and strangling the country like the vines of the stranglehold fig on the trees by the Amazon river. Bureaucracy offers officials the opportunity to earn extra income. The constitution has 268 articles, but who cares? If you need a passport in the north, you may travel 1000 kilometers to an office far away only to be sent back because you need four other documents including proof that you have voted. Or you pay the official. Such officials are mainly local policemen, underpaid and in need of extra income for their families.

Brazil belongs to the slowest countries in the world, together with Indonesia and Mexico, claims the American psychologist Robert Levine. Time does matters less and to be on time is not a Brazilian virtue. This is just the opposite to dynamic China.

Environmental protection has improved greatly with stiff punishments for deforestation. Nevertheless the forests are reduced each year because small farmers and agro-industry ever more land.

Happy kids at school: "The education level in Brazil is breathtaking poor above the early grades of school. With no focus on teaching English, the language of the internet age, most Brazilians lock themselves out of global knowledge flows – even many Brazilan businessmen, politicians and intellectuals."

Another major problem is the low level of waste management with organized disposal of only 10% of the 100,000 tons of domestic waste generated per day. Three million tonnes of hazardous waste are stored in Brazil. In Rio alone, 500 tons of fecal matter and trash and 50 tons of oil pour untreated into the romantic bays every day.

What about foreign and defense affairs?

Brazil’s armed forces are small (300,000 people) and under-funded, but they nevertheless push for two large prestige projects: a nuclear-powered submarine and the aircraft carrier "Nae Sao Paulo" (the former French Navy "Foch"). Neither make sense militarily or for efficiency.

General Jose Benedito de Barros, one of the key advisors of the defense minister, argued in a 2007 interview that a nuclear submarine is essential to protect Brazil's vast natural resources including oil-fields like Tupi. One month later he stated that "Brazil should develop the technology necessary for a atomic bomb", which would be a breach of the NPT agreement. For decades the Brazilian Navy have dreamed of a nuclear sub to gain prestige and power projection capability in the region. This submarine could be ready in ten years.

It seems absurd, because of 21 ships, 11 are immobilized and 10 operate with restrictions. Seventeen ships are due to retire within the next two years. And oil platforms 400 kilometers away must be protected by a functioning flotilla of ships, not one lonely submarine.

Yet President Lula and his government have prioritized this, along with other activities to please the armed forces. They aim for prestige with three secret programs for a nuclear fuel cycle, reactor and the submarine construction. They want to push Brazil into the league of major powers. For years the government and navy have been in discreet talks with France and Russia to acquire nuclear and submarine technology for this nuclear dream project. France hesitates, but would like to sell its conventional submarine for approx $ 1 billion along with many other arms to Brazil.

Brazil also flirts openly with Iran and is the most unpredictable G8 country, with a lust for adventure. It has achieved much since the troubled times of only thirty years ago. The currency is stable too. Yet the ice is still too thin to skate heavily. Instead of a nuclear submarine, Brazil should pump billions into higher education and infrastructure. It should pass down more fruits of development to the poor. Without a national action plan for the reduction of corruption, planning is hard and much-needed foreign investment goes elsewhere. These will be all be issues for the new president to be elected in October. Lula cannot run for office again after his two terms.

But Brazil can do well!

Look at the very successful aircraft manufacturer Embraer, or the most efficient truck company in the world run by market leader Volkswagen. Don’t forget the success story of ethanol bio fuel which now fills 20 percent of all fuel tanks in the country.

Where know-how is combined with the oxygen of freedom and creativity, success prevails in Brazil.

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Dr. Hubertus Hoffmann is a German geo-strategist, investor, internet-pioneer based in Berlin.
His three main focuses as a philanthropist are: - 'Networking a Safer World', with the largest global elite network in foreign affairs, the independent World Security Network Foundation (www.worldsecuritynetwork.com). - The Human Codes of Tolerance and Respect - promoting understanding and concrete actions for tolerance towards other religions,…